Hey colleaguesI cant give you a write up now, but I highly recommend looking at DOW Chemical.Today they are selling at around $21.58. That puts their divi yield at around 4,5% and a payout ratio of 32%.Everytime someone mentions the word recession, DOW tanks another $1.I have held onto DOW through the Rohm & Haas acquisition, the Kuwaiti JV debacle up until today. I believe Mr. Liveris has done an outstanding job, the Rohm%Haas acquisition has been everything they said it would be, they are looking at other joint ventures now in the middle east and their eyes are firmly set on the goal of less cyclicality, higher margins business. Liveris had to cut the dividend before and I feel supremely confident that he will make sure that doesnt happen again.Point being - if DOW goes below $20 when the Greeks finally do default, we could be looking at a great business with growth, dividend growth and 5% yield.they have $2 b in cash, 3.4b in cash flow, 18b in debt - current ratio 1.83.This is not the DOW your mom told you about.anyway, just a shout from the shadows (boo!)
aitrader,I have several concerns when it comes to DOW.- They have dramatically underfunded PPE since 2008. I really don't care if over time if the CapEx:Depreciation ratio but underfunding PPE has to bite back at some point. - In recent quarters they have been depreciating as much in a quarter as they have in the past through an entire year.- The combination of these to accounting maneuvers skews FCF calculations because Depreciation is an addition while CapEx is a subtraction in the formula.If you assume a more normal CapEx their FCF goes to tiny. If FCF is tiny so is the DCF value. By their numbers I have a FCFE IV of $64Using their 2007 CapEx the value becomes $43. Using 2007 CapEx and averaged Depreciation the FCFE IV becomes -$8-I have ROIC 6.6% and WACC of 9.15%. They are upside down and possibly destroying value. -I have an estimated growth of -6.98% using their current numbers. I would categorize DOW as high risk, low reward and I would pass.jack
Dear Jackthanks for looking at the underbelly of the beast (never fun).Ok, help me out with this:From the DOW 2010 10K: page 130http://secfilings.nasdaq.com/filingFrameset.asp?FileName=000...The Company’s investment strategy for the plan assets is to manage the assets in relation to the liability in order to pay retirement benefits to plan participants while minimizing cash contributions from the Company over the life of the plans. This is accomplished by identifying and managing the exposure to various market risks, diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plans. From page 129, the best that I can tell is that plan obligations at the end of 2010 were 21,158 b$ . Plan assets were 15,851. (on page 132 they list the PP investments)If you note on page 130, under defined pension benefit plans and go down to change in plan assets , you will notice that from 2009 to 2010, the plan assets grew in value by $3b, reinforcing above quoted statement about managing assets in order to minimize direct investment. Obviously, the Great Recession hurt PP assets value, as it did all of our portfolios.However, if you look to page 130, they state Estimated Future Benefit Payments at December 31, 2010 . through 2020, they estimate 12,709 in benefit payments, which appear to be more than covered through their current Plan Asset management program.going back up to page 129, under "change to plan assets" again, they state that actual return on plan assets for 2009 and 2010 have been 2,155 and 1,754 $b respectively, appearing to more than cover the expected yearly benefit payments listed in schedule noted above.Question: does this information allay some of the concern or only create more?With regard to depreciation, that is an area that I am less familiar with. I had my own business - an import/export business - where depreciation was not a factor, so I dont really know the business strategy about the when and what of increasing or decreasing the depreciation schedule.However, first and foremost, I dont think using the 2007 schedule is an apples to apples situation because the Rohm%Haas acquisition has been a game changer for the company.From Gurufocus 10 yr. financials:http://www.gurufocus.com/financials.php?symbol=DOWExcept for 2008 and 2009, the years of the R%H takeover and the Great Recession, DDA increase has been between ,5 and 5% per year every year.At the same time, it is noted that while the DDA seems to be growing at a planned rate, it is in stark contrast to the cyclical revenues the company has generated over the last 10 years, indicating to me that the DDA has not been a tool of the business strategy or balance sheet manipulation but rather more of the normal course of the depreciation cycle.Granted however, what does seem curious are the 2008 and 2009 DDA increases in light of the strong impairment in earnings. However, these are anomalies to the 10 year trend and accdg. to TTM is decreasing for current year.I went back to Gurufocus and their DCF calculator, which I like because they only use tangible book value as part of the basis for their estimates.http://www.gurufocus.com/fair_value_dcf.php?symbol=DOWThe avg. growth rate over last 10 years has been 5.7.So I used 5% growth over next 10 years, 3% terminal rate and a 15% discount rate to reflect your risk concerns. They estimate a $31.67 IV.I happen to prefer your $43 IV price because I believe the moves they are making toward higher margin chemicals has not yet been reflected in either analyst assumptions or historical trends.I dont really know where you get the -6.9% negative growth figure from - is that revenue, EPS or another metric?I agree their ROA and ROE are not world beaters, but I dont expect quite as much from what has been up to now a cyclical low margin chemical company.My interest lies in the DOW company that bought Rohm % Haas, which has not been materially fully integrated yet, and is seeking partnerships in the middle east for low input cost parnterships with the ability divest themselves of some of their low margin platics.I personally believe the picture you paint is of the DOW from 2007, which was not an interesting invesmtment. But because of the turbulent last 3 years, I dont have reliable or tested revenue and earnings data to back any of that up.I guess my point is, if we agree that we dont need to go to the extreme of using 2007 CAPEX and the averaging of DDA at a manipulative level, I think that an $18/$19/$20 buy in price should be worth considering because they are, after all, an over 100 year old company with a well covered dividend that rose dramatically last year and has been promised to be raised again.anyway, thank for the excellent information and feedback.aitraderslong DOWby the way, if Paul Eckler is reading any of this, I would love to know his take as I have been a secret admirer of his DOW board posts for quite a long time.
aitrader,Question: does this information allay some of the concern or only create more?Any undefunded pension program needs to be watched carefully. If the primary plan to fully fund the program is to use the markets I would be very nervous. What got many pension plans in deep water were pie in the sky growth estimates that only work during the best years. I seriously doubt DOW CFO staff rivals that of Goldman Sachs or some of the better hedge funds. If they were that good a great deal more money can be made elsewhere. I personally believe the picture you paint is of the DOW from 2007No, the financial picture I painted is based mostly off of the last 4 quarters using an eye on the past for guidance. There are a serious issues with their CapEx and Depreciation. The reason I reached back to 2007 is because that was the last rational CapEx number used by this 100 year old company. Their business model did not change that dramatically with the acquisition of a specialties chemicals firm. An increase in depreciation can be understood. They acquired another firm therefore more assets to depreciate. It is also not unusual for a firm, if given the opportunity, to accelerate depreciation. I assumed an accelerated depreciation schedule and then smoothed it via averaging. Here is the problem, DOW is not fully funding its own infrastructure, the very things it uses to take raw inputs and add value to them for wholesale. How long can we expect them to add value at reasonable margins while their facilities decay? At what point are they forced to expend the money they did not expend over the last 3 years?In a fully mature business like DOW we can anticipate Depreciation and CapEx to be about equal. If they are expanding CapEx may be larger than depreciation; depreciation would lag as the new equipments was first purchased and then the next qtr or year they would begin depreciating it. Depreciation may be larger if they are acquiring or phasing out specific units. Over all the two numbers should be relatively close to each other. The concept is relatively simple, as soon as we buy a new car we are on the path to buying the next one. As soon as we roll off the lot the car has depreciated by 10% or more. For each year we own the car it continues to lose value. Each year we own the car we must perform basic maintenance on the car or it will fail long before its expected life span is over. After X number of years, depending on use, the useful life of the car is gone and it begins to become more expensive to maintain then to purchase new and must be replaced. As a business we can claim that loss in value using depreciation and we either need to budget monthly or annually for its replacement or find the lump sum at the end of its usefulness in another account or obtain debt. Right now DOW is barely putting oil and windshield fluids in their vehicle. I dont really know where you get the -6.9% negative growth figure from - is that revenue, EPS or another metric?The formula is ROIC * Reinvestment Rate6.6% * - 105.85% = - 6.98%This is a direct reflection of their failure to invest in themselves via CapEx. Change the CapEx to a historic average rate and the estimated growth rate goes marginally positive. Right now, today, the past 3 years they are not reinvesting adequately enough to anticipate growth. When I look at their books and the cut dividend what I see is a company that is choking on its last acquisition. The synergies may make sense but it does not look like they could afford what they took on. In order to generate the cash needed to keep basic functions rolling and to pay for their new division they are robbing their future. Their current cash flow is not sustainable. If I was a rating agency I would have them on credit watch. Currently this is not a healthy company. Maybe they can get ahead of this mess and turn a corner but it will take a fair amount of time and it will be painful. I would not buy this for $10/share, the risk reward scenario is weighted too heavily toward risk. Good luckjack
Thanks for taking the time to go through that Jack. You are right about them not being able to afford what they took on. They had intended to sell $bb's in assets to the Kuwaitis in a JV and use that cash to buy R&H. The Kuwaits backed out in an 11th hour debacle and lawsuits were already starting to fly should they have backed out of the R&H deal. They ended up financing it rather 'creatively' by getting owners of R&H to take DOW stock, IIRC and other elaborate measures.Anyway, you have given me a lot to think about. I still dont think that I see it as dire as you do, but now that I have taken off my rose colored glasses I should be able to read more of the fine print.cheersaitraders
great discussion guys--thanks!
Great discussion guys.Jack,Here is the problem, DOW is not fully funding its own infrastructure, the very things it uses to take raw inputs and add value to them for wholesale. How long can we expect them to add value at reasonable margins while their facilities decay? At what point are they forced to expend the money they did not expend over the last 3 years?I drive by their home digs in Midland, Michigan probably 5 or 6 times per year. They ARE keeping those facilities in very good condition. And, I doubt they are letting their other facilities around the globe delapitate either. So, I don't agree with your perceived "problem" gleened from looking at just 4 quarters of data.When dealing with long lived assets that the divisor is > 30 years, maintenance capex isn't needed to be dolled out at a uniform annual rate like the D&A expense implies. The expenditures come in chunks, like 10 years or more apart. Fwiw, $35 is a pretty good fair value, imho. Get a real up turn in the economy and $55 isn't out of the question.Richps: I own shares.
aitrader,but now that I have taken off my rose colored glasses I should be able to read more of the fine print.As long as folks are going into an investment with eyes open that is the best they can do. Rose colored glasses tend to make things show up red on our statement of holdings.I would keep a wary eye on CapEx, Depreciation, share count, debt and retained earnings. Any significant changes in those lines should alert you to the direction of the company. I hope this works out for you.jack
Just in time for another POD from Jack, with credit for others. HP
Rich, TTTM q q q q 2010 2009 2008 2007Depreciation 7328 1428 731 2962 2207 2962 2827 2236 2190CapEx -495 0 -405 -45 -45 -45 -713 -63 -2105 I'm sorry but a drive buy at +35mph through a chain link fence is a very poor way to judge the maintenance of their facilities. This is not one or two quarters of failure to invest in themselves.Total assets spiked in 2009 which is when we can assume the large acquisition made it to their books. Starting in 2008 they began to squeeze CapEx in order to pay for this acquisition. Prior to the acquisition Depreciation and CapEx were in near balance. If we start in 2008 we can estimate their annual and their total CapEx deficit. The one caveat is that they obviously accelerated depreciation during this year and we can smooth that by substituting an average of the last 3 years. SmoothedTTM 2010 2009 2008 Depreciation 2675 2962 2827 2236CapEx -63 -713 -45 -495_________________________________________________Deficit 2612 2249 2782 1741 = 9384Over the last four years they have shorted CapEx expenditures by 9.4 billion, that is not chump change. The life cycle of these plants may be 20,30 or even 60 years but 4 years of dramatic underfunding is going to start finding its way into the system. It has also dramatically skewed free cash flow numbers for the last 4 years. Anyone using those numbers for predicting an IV without correcting for this unaccounted for liability, basically a debt, is ending up with an unrealistic output. If I run the numbers straight as is, use a 3% growth and 10.95 discount I get a FCFE IV of $56. If I take the simplistic route and adjust net debt for the shortfall the price falls to -$45. If I use average CapEx and average Depreciation in the formula I end up with an FCFE IV of $1. I'm not saying that either of these is the right IV. I am doing it to point out that failing to fund CapEx has a significant impact to IV. No matter how I tweak the spread sheet they are ROIC/WACC upside down and destroying value. With four years of sacrificing CapEx they have only managed to reduce their long term debt by 275 million from the post acquisition debt of 19,152. They have exchanged 9.4 billion in deferred CapEx for 275 million in debt reduction. That is ugly math. The truth that can be inferred from their filings is that they are sacrificing today in hopes that they can weather this storm and have a better tomorrow. The only investing thesis that works is that you believe they can get ahead of this cash flow problem. If it turns south and bites their credit will be junk within days. The only way they have enough cash flow to service their debt is if they rob CapEx and throw it at debt service. This firm is walking a tight rope without a net.Strategically they need to raise big cash and they cannot afford to raise it through debt with out crushing their already weak position in the debt market. If they don't find buyers for other assets at best I would anticipate very below average returns relative to the S&P500 and their peers. I would also expect the dividend to be slashed or ended. All of this is my analysis based on a quick and dirty look at this firm. I would welcome a strong rebuttal. jack
TTTM q q q q 2010 2009 2008 2007Depreciation 7328 1428 731 2962 2207 2962 2827 2236 2190CapEx -495 0 -405 -45 -45 -45 -713 -63 -2105
SmoothedTTM 2010 2009 2008 Depreciation 2675 2962 2827 2236CapEx -63 -713 -45 -495_________________________________________________Deficit 2612 2249 2782 1741 = 9384
Without getting into the depreciation/cap ex debate, there are other obvious warning signs that an investment in DOW's stock might be a bit of a gamble.First off, the company is clearly very sensitive to economic conditions and at the first sign of a recession, or slowdown, their earnings have historically taken a large hit. In fact, their per share earnings have been a roller coaster ride to nowhere for buy and hold investors.Predictably enough, as earnings plummeted, so did margins. During the 2001 recessions, although earnings took a big hit they didn't lose droves of customers, which was not the case for '09 when sales contracted almost by half. The same year their sales were plummeting they plumped up their debt obligations to over $19 billion which is approximately seven times last years net profit. Meanwhile, book value had been on the decline since 2008 and although it has climbed again some the vast majority now consists of goodwill and intangibles. So what you have here is a company that has borrowed an awful lot and has little capital in reserve that has a history of erratic earnings, margins, and sales. There's lots of better opportunities…kelbon
Kelbon, your writing is very insightful and I learn a lot from your comments. I know this is minor, but really ..."There's lots of better opportunities..." should be "There are lots of better opportunities."ARE is used with plural nouns, NOT IS.
blearynet,Of course, you are right about my grammatical ineptitude. Thank you though for the "your writing is very insightful" compliment.Yes, I can't believe the grammatical errors I sometimes make. Perhaps it's the rush of trying to get my thoughts down before they evaporate and are lost. Also, I'm listening to the voice in my head, and what one says in conversation isn't always grammatically correct. In a verbal exchange perhaps you wouldn't think twice about hearing: "There's lots of better opportunities out there." That was probably how I missed that one!Sometimes, after I have given a cursory proofread to a post and hit the submit button, I'll read it a day or two later and some grammatical, or even nonsensical, error will erupt from the page thumbing its nose at me. How did I possibly miss that? It's so obvious and glaring. It's interesting how grammatical errors seem so front and center in posts, but in my own I don't even see them! I'll try and take comfort in the fact that Winston Churchill apparently couldn't, or couldn't be bothered, to either spell correctly, construct sentences correctly, or punctuate correctly. His editors had their work cut out. Without spell-check, there would be much more to complain about. I've never been able to spell well, even with effort!If there are grammatical errors in this reply, please be kind enough to overlook them :)kelbon
Kelbon,I don't know what your "day job" is, but please DO send MORE of your thoughts, even with minor grammatical errors, if that's what it takes to get your insights.I'd blame it on the inability of TMF posts to be corrected once submitted, and somehow the latest version of Explorer took away my spellcheck capability inside these types of posts.Hockeypop ... who is thkfl tht u dnt uz txt spk lk my son. THT drvs me crzy!
Kelbon,Your posts are so worthwhile. I know that I have learned a lot from you. In no way was I criticizing your writing. It was just a minor grammar point that was shouting at me, for some reason. Keep the wonderful posts coming!
and somehow the latest version of Explorer took away my spellcheck capability inside these types of posts.Problem solved. :<)http://www.google.com/search?source=ig&hl=en&rlz=1G1...B
Thanks! iSpell caught an error.HP
kelbon,I'll try and take comfort in the fact that Winston Churchill apparently couldn't, or couldn't be bothered, to either spell correctly, construct sentences correctly, or punctuate correctly. His editors had their work cut out...As usual, you give context to your post regardless of topic*!I wish there were a TMF opposite of "ignore this person" for folks like you who post such helpful material to those of us who are in the novice camp. Something along the lines of "highlight this post" whenever you author something would so:) Favorite Fools is simply not enough...Pete* Winston Churchill quotes are some of my favorites, especially the witticisms that involve Lady Astor. He's also a great homespun philosopher, in some ways: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
fwiw, obviously my stuff is riddled with typos but I really don't care (on the boards). When somebody gives me a potential 10-bagger, I don't care how they present it either as long as they present it. Course, in my industry there are most people who preach "enriched life" and "setting goals" with ZERO accountability and there are the minority who preach measurement and benchmarks. You see this a lot on value investors club - long write-ups often get big ratings, and simple ideas get crummy ratings. Course, the irony there is things are date-stamped, so the stock results become obvious soon enough. It was Lynch who wrote that the glibbest survive on Wall Street, but he focused on the quality of the idea rather than the presentation.so keep posting, typos and all, and for heaven's sake don't waste your time proof-reading it
Jack,There’s something significantly wrong with the CapEx numbers you posted.First, according to the CF statement (page 5) in this 10-Q:http://sec.gov/Archives/edgar/data/29915/000002991511000032/...thru the first 6 months of this year CapEx has totaled $969 million. This compares to your table’s $495 million supposedly through the last 12 months. How can that be?Second, the 10-K for 2010 provides a table on page 26 that gives some of the most extensive “Selected Financial Data” that I’ve ever seen reported. The best part is that it spans all the way back to 2000 in a single filing. Both of the line items of interest, namely Depreciation and Capital Expenditures, are contained in that table. For the benefit of post passerby’s, I’ll post my reproduction of those two line items in a subsequent post as it will likely be very wide and make my comments difficult to read.Here’s the 10-K:http://sec.gov/Archives/edgar/data/29915/000119312511040023/...Some key points are that 2010 CapEx was $2130 million compared to your $45 million. In 2009, CapEx was $1683 million versus your $713 million. At this point, I give up in trying to verify your CapEx numbers as they appear to be pure fiction. I didn’t bother to check your depreciation numbers. As for your conclusions they are likely as accurate as your numbers.From my ensuing table you’ll be able to calculate with the aid of a calculator that the trailing 3-year deficit of CapEx to Depreciation totals $507 million. This, of course compares with your ludicrous $10 billion deficit.Over the entire time frame that my table spans, a deficit is shown totaling $1.8 billion. However, I’m going to chalk that up to two recessions (you are right that Dow pulls back on discretionary spending during lean times – as they should, imho. Also, after the Kuwait deal fell through CEO Liveris said they would be doing this so it isn’t really a surprise. But none of this is no where near the magnitude you were talking about. And, Dow makes up for it during the fat years if you look at my table.As my comments earlier might have suggested, I’ve always viewed depreciation skeptically because of how far from reality useful life estimates actual turn out. The best simple example I can think of is that I’m typing this post on an 11 year old computer. 3 years, my a$$! It works fine, too. My point in all this is you need to think about what the numbers really mean and how the “story” plays into those numbers. It helps to have accurate data, too.I might point out here that an accelerated depreciation via low estimates of useful life (all within the IRS rules of course) is a good thing from a shareholder perspective when you consider the time value of money and that taxes are delayed.Needless to say, I trust my eyes as they look through a chain link fence over your numbers. You are, of course, free to draw any conclusions you’d like now that you have the actual reported numbers to work with. I won’t be reading them, however. Nor will I reply.Adios.
Year ($Millions) 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 SUMDepreciation 2289 2291 2016 1959 1904 1904 1904 1753 1680 1595 1554 20849Capital expenditures 2130 1683 2276 2075 1775 1597 1333 1100 1623 1587 1808 18987Deficit 159 608 -260 -116 129 307 571 653 57 8 -254 1862CapEx/Dep 93.1% 73.5% 112.9% 105.9% 93.2% 83.9% 70.0% 62.7% 96.6% 99.5% 116.3% 91.1%
Year ($Millions) 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 SUMDepreciation 2289 2291 2016 1959 1904 1904 1904 1753 1680 1595 1554 20849Capital expenditures 2130 1683 2276 2075 1775 1597 1333 1100 1623 1587 1808 18987Deficit 159 608 -260 -116 129 307 571 653 57 8 -254 1862CapEx/Dep 93.1% 73.5% 112.9% 105.9% 93.2% 83.9% 70.0% 62.7% 96.6% 99.5% 116.3% 91.1%
Hi k,First off, the company is clearly very sensitive to economic conditions and at the first sign of a recession, or slowdown, their earnings have historically taken a large hit. In fact, their per share earnings have been a roller coaster ride to nowhere for buy and hold investors.That's the best part! You see, Mr. Market responds, in kind, by driving the share price both up and down enthusiastically in anticipation of those bouncy numbers. If you understand the company, it's valuation, and are willing to buy and sell to take advantage you can make a ton of money.Dow is best thought of as a cyclical and is not a good choice for a buy and hold approach. See Intelligent Investor's discussion of Chrysler.Rich
Out of curiosity I took a look at Value Line's numbers:Year ($Millions) 2011* 2010 2009 2008 2007Depreciation 3000 2962 2827 2236 2190Capital expenditures 2201 2124 1679 2273 2078*EstimatedThat's the best part! You see, Mr. Market responds, in kind, by driving the share price both up and down enthusiastically in anticipation of those bouncy numbers. If you understand the company, it's valuation, and are willing to buy and sell to take advantage you can make a ton of money.I think, to be successful at this game you would have to not only understand the company but be able to anticipate the mood swings of the market as well!For example: into the early months of 2005 the shares were on a tear, having risen convincingly along with earnings, for the previous two years. Although earnings for '05 were considerably higher than the previous year's, Mr. Market had already decided it was time to give the shares a haircut and slammed the stock price and the P/E by about a third. Earnings started to drift lower after '05, and the stock price drifted too but more or less revisited its heights as the market peaked in the summer of '07. Then, predictably, with almost every other stock, a huge slam as the "great recession" set in.Nice recovery from the depths of March '09, for the stock price and the company's earnings. Earnings are projected to be higher for this year but regardless manic Mr. Market decided to slammed the stock price from a high of $42 to a low of $20. Now the stock price is on an upward march again. Keep tuned, will Mr. Market get angry and scared again? Will the economy slip back into a recession, and DOW's volatile earnings with it? Or, will there be calm for a while? Beats me. Buy, sell, or hold?kelbon
Year ($Millions) 2011* 2010 2009 2008 2007Depreciation 3000 2962 2827 2236 2190Capital expenditures 2201 2124 1679 2273 2078*Estimated
Rich, I hope you at least glance at this post because we have had many discussions across several boards about managing emotions and you seem extremely defensive which is not strong position to be making investing decisions from. I don't have a dog in the fight when it comes to DOW. I am neither short nor long. I am long DD a competitor and I believe there is plenty of space for both so I have no need to see DOW fall.There’s something significantly wrong with the CapEx numbers you posted.Which is always possible that is why I stated All of this is my analysis based on a quick and dirty look at this firm. I would welcome a strong rebuttal. You asked where I got my numbers. I freely stated this was a quick and dirty look so I used easy access numbers from MarketWatch. http://www.marketwatch.com/investing/stock/dow/financials/ca...A source I have found accurate more often than not and thus adequate for quick looks. I appreciate the rebuttal using source numbers. I will take a close look at the SEC filings and see if it is a simple data push algorithm issue or if there is something serious lurking in the filings. jack
I will take a close look at the SEC filings and see if it is a simple data push algorithm issue or if there is something serious lurking in the filingsIt is a data push error. DOW has a line titled "Purchases of Previously Leased Assets" that filled in the data for MarketWatch's PPE line. jack
Breaking news item-DOW & Saudis to build a new plantDow Chemical Co. and the Saudi Arabian Oil Co. said Saturday that they signed an agreement that advances their plan to build one of the world's biggest chemical plants in Saudi Arabia. The $20 billion complex is expected to begin production in 2015.The two companies agreed to a joint venture for Sadara Chemical Co., which will own the plant being built in the desert kingdom. The companies estimate it will generate about $10 billion in revenue annually within a few years of operation.Dow and Saudi Aramco together are investing about $12 billion, and a portion of Sadara will be sold to shareholders in a public offering in 2013 or 2014. The complex, with 26 manufacturing units, will be the largest integrated chemical facility ever built in one go, the companies said. http://finance.yahoo.com/news/Dow-Saudi-oil-company-sign-apf...
With a GIGO error in the thread it seems only proper to offer a revised assessment using the SEC's filings numbers. As always check my numbers, check my math and check my logic.FCFF Where FCFF = NOPAT + Depreciation - CapEX - Change In Working Capital. TTM 2010 2009 2008 2007NOPAT 4343 3794 2137 1274 3569Dep 2899 2962 2827 2236 2190CapEx -1280 -2130 -1683 -2276 -2105C W.C. -2649 -4763 -1606 -5059 ?___________________________________________FCFF 3261 -55 1640 -3825 ?AVG FCFE For trailing 3 years and ttm = $2555 yr near term growth 2.5% (ROIC * Reinvestment rate = 6.6%*35.3%)next 5 years growth 3%Terminal growth 3%Discount 9.14%IV based on average FCFF = -$15IV based on TTM FCFF = $26An EVA approach yields a negative value because they are and have been upside down ROIC - WACC. DOW closed at $26.19 on Monday 10/10jack
TTM 2010 2009 2008 2007NOPAT 4343 3794 2137 1274 3569Dep 2899 2962 2827 2236 2190CapEx -1280 -2130 -1683 -2276 -2105C W.C. -2649 -4763 -1606 -5059 ?___________________________________________FCFF 3261 -55 1640 -3825 ?AVG FCFE For trailing 3 years and ttm = $2555 yr near term growth 2.5% (ROIC * Reinvestment rate = 6.6%*35.3%)next 5 years growth 3%Terminal growth 3%Discount 9.14%IV based on average FCFF = -$15IV based on TTM FCFF = $26
1. Don't draw swords with Zorro;2. Don't pull the mask off the Lone Ranger;3. Never start a land war in an Asian country;4. When it comes to numbers .......HP
Hi Jack,I sense (and I could be wrong) that you are maybe setting up to apply a steady uniform growth approach to Dow starting with recent data points. It has been my experience that this type of approach always fails miserably in valuing anything cyclical. At cyclical lows a very low value is calculated. At cyclical highs, a very high value is calculated. The reality is somewhere in between and the average of the two seems to be a reasonable compromise.Two of the three years you are looking at are likely to be the cyclical low. So, evaluating based on just those three years only gives a picture of the worst it can get, probably. (who knows with this EU thingy).Dow is extremely cyclical with businesses primarily dependent on housing, auto and other industrial sectors. They are also dependent on gas and oil prices. For the most part, they have the ability to pass on higher prices in these comodities and improve margins as a result. So, rising oil and gas prices actually helps Dow - counter intuitive, really. If and when the economy recovers Dow will return to where they were a few years back or there abouts, absent any assumed "growth" in the business.I think Ben in Intelligent Investor outlined a fairly decent approach for handling cyclicals. Basically, work with either the most recent cyclical high results and the most recent cyclical low and average the result, then project from there. Or, work with at least 7 years of data so long as there is both a "high" and a "low" year within that time frame. Do that with FCFE, FCFF or E whichever is your preference. Using curve fitting techniques to arive at a historical growth rate with the bumps taken out might be helpful too but I've never actually done this although it could be suggested that that is what the BMW method does and I do consult those charts from time to time.Both the R&H acquisition and the pending JV with the Saudis will likely drive growth somewhat faster than the historical record might show (calculated over a long time period). I'm also interested to see how their new solar shingles will be received by consumers and builders. They will be availble soon from what I've read and they could be a big hit or dud. Not sure which but it will be interesting to see what happens.If you really want to dig into Dow. I'd recommend that you check out one of the analysts meetings docs on their website. You'll get some color on what all is going on at Dow. I'd take Liveris' projections of future earnings with a grain of salt though - might be a tad optimistic.Rich
Rich,Thanks for the insights on DOW and cyclicals in general. I am in much agreement with your outline on how to deal with cyclicals and like you have never made a serious attempt to implement the technique. Currently there is no H.P. sandbox money to play with and I am intrigued by AA as a cyclical far more than DOW. I follow DOW as a sideline because I own DD, it is a way to keep an eye on the industry while trying to manage DD blinders. I agree that DOW is often able to pass their input costs onto their customers, most in the industry are able to do so. After running through the correct numbers I am still concerned over the cost of the acquisition. Dow has been FCF negative as often as positive over the last 5 years and made very little progress managing their debt or cost of debt. The J.V. partnership may help but that also involves a huge outlay on their part, an outlay I'm not convinced is as fiscally sound as it is strategically sound. Cyclical or not they need to have enough cash running through the machine to keep the machine running and weather the bottoms of their cycle. Debt is currently 3.6 times EBIT, 3.9 times average FCFF and their interest coverage ratio is 3.45. This is not a sound balance sheet nor is it a balance sheet in complete shambles. I don't see where they can afford to take on much more strategic debt when they may very well have to take on debt to float through the low in this recent cycle. Most forecasts have slow global growth as two of the largest markets, Eurozone and U.S., dig out of their prior over leveraged mess. While it seems that DOW is assuming a more standard V shaped recovery that would generate enough cash to help improve their balance sheet. The cost of debt currently is stupid low and that is no excuse to pile on debt. I don't think it was smart of MSFT, INTC or CSCO to take on debt because they don't have a plan to use those assets. I also don't think it is smart to over extend on debt simply because debt is cheap like DOW appears to be doing. Hundreds of companies are using the current debt prices to improve their balance sheet DOW doesn't seem to bother. Just for fun I may dump in a few more years of data in ye' old spread sheet and see if that lends some insight to the value of this cyclical. If nothing else it is good practice for investigating AA.jack
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